Yahoo Finance How Financially Strong Is Lanka Graphite Limited (ASX:LGR)?
While small-cap stocks, such as Lanka Graphite Limited (ASX:LGR) with its market cap of AU$5.10M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since LGR is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into LGR here.
How does LGR’s operating cash flow stack up against its debt?
LGR has built up its total debt levels in the last twelve months, from AU$230.00K to AU$1.37M . With this increase in debt, LGR currently has AU$80.95K remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of LGR’s operating efficiency ratios such as ROA here.
Can LGR meet its short-term obligations with the cash in hand?
With current liabilities at AU$2.29M, the company is not able to meet these obligations given the level of current assets of AU$81.61K, with a current ratio of 0.036x below the prudent level of 3x.
Does LGR face the risk of succumbing to its debt-load?
With total debt exceeding equities, LGR is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since LGR is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
LGR’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for LGR’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Lanka Graphite to get a more holistic view of the stock by looking at:
Historical Performance: What has LGR’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
